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Who Let the Lights Go Out?

Corporate Research E-Letter No. 39, September 2003

WHO LET THE LIGHTS GO OUT? A LOOK AT THE U.S ELECTRIC POWER SYSTEM

by Mafruza Khan

On August 14, 2003, the largest ever blackout in North America cut power to 50 million customers in the Eastern United States and Canada. This was twice the number of people affected in the Great Northeast Blackout of 1965, the record before. Economists say that the power cut that brought eight states to a standstill will shave off half a percent off the U.S gross domestic product growth for the third quarter of the year, or an estimated $500 billion.

As Congress convened this month after its August break, lawmakers from both parties are scrambling to push their own energy agenda against the backdrop of last month's unprecedented power outage. The Bush administration and Congressional Republicans want to enact broad energy legislation that includes tax incentives for modernizing the transmission grid as well as for oil and natural gas drilling in the Arctic National Wildlife Refuge in Alaska and fossil fuel production in the Gulf of Mexico. Republicans are also expected to demand provisions to stimulate construction of new nuclear reactors. But Democrats say a narrowly crafted and less controversial measure devoted only to improving the electricity grid should be completed quickly to ensure the reliability of the system. Both bills include mandatory reliability standards for the electricity industry, the one idea that lawmakers, industry lobbyists and consumer advocates all agree on.

The most contentious issue facing Congress involves the Federal Energy Regulatory Commission (FERC) rule that would change the way electricity is regulated. FERC wants to require electric companies to hand over control of their high-power transmission lines to regional organizations, which would then determine how to allocate electricity within their area on any given day. FERC also proposes to take greater control of transmission rules and fees, both of which are now in the hands of state regulators. The FERC plan would also encourage states to allow independent companies, such as Dynegy and Reliant, to sell electricity to retail customers. The proposed plan has sparked regional warfare. Southeastern lawmakers fear that it would cause their low electricity rates to soar. Western lawmakers, still hurting from California's 2000-2001 energy crisis when FERC failed to act as rates skyrocketed throughout the West, are loath to give the agency more control over their electricity system. In general, opponents contend that the plan is untested, dangerous and a violation of states' rights.

THE U.S ELECTRIC POWER SYSTEM

The nation's grid system consists of thousands of power plants, tens of thousands of sub-stations, switching facilities and other specialized equipment, hundreds of control centers and about 260,000 miles of power lines stretching all across the country. The U.S portion of the blackout included 34,000 miles of transmission lines and about 290 power generation units.

Until recently, the U.S electric power system consisted primarily of full-service utilities that generated, transmitted, and distributed electricity to customers at rates set by regulators. But now about half of the states and the District of Columbia have passed legislation or issued regulatory orders that permit customers to choose the company that supplies their electricity. Almost all the other states are considering proceeding in this direction. At the federal level, FERC has attempted to increase the role of competition in generation markets through its implementation of the 1978 Public Utility Regulatory Policies Act and the 1992 Energy Policy Act.

While there has been enormous investment in electricity generation there has been relatively little attention paid to the maintenance and expansion of the lines used to transport electricity. The U.S Department of Energy estimates that electricity-generating capacity in the U.S alone will increase by more than 20 percent by 2010; transmission line capacity in that same period is expected to increase by only four percent. Since the transmission lines are shared, there is little incentive for companies to invest in their upkeep. The recent outages are expected to open a window of opportunity on dealing with this neglected but critical aspect of infrastructure maintenance. "This is the moment when the electric industry will either make a credible showing of openness to new technology or it will sink back into the quagmire of new transmission-line battles," said Ralph Cavanagh, director of the energy program at the Natural Resources Defense Council.

But there are strong barriers to adopting new technologies, which include developing high-speed digital switches to halt or reroute power after a disturbance and using "superconducting" wires. Digital switches respond in less than a second, while older electromechanical switches take a minute or more. Given the speed at which electricity travels, a minute-long delay can have catastrophic consequences. "Superconducting" wires can carry 25 times as much electricity as standard copper cables. Some technologies, first designed for high voltage national wires, are trickling down to local networks. WAMS or Wide-Area Measurement System is part of a growing group of technologies collectively referred to as "smart grid," which monitor high-voltage lines with computer sensors offering a continuous, current snapshot of operations. The popularity of real-time monitoring has soared in recent times; the Bonneville Power Administration's (BPA) monitoring program has become a national model. BPA is a federal agency, based in Portland, Oregon, that markets power in the Northwest.

Deregulation, which has overwhelmed the grid with interstate traffic, has discouraged investment in the very upgrades that might relieve the congestion. Some industry analysts contend that by encouraging an open market for energy sales, deregulation tends to pit local utility companies, which own the majority of the nation's high-voltage transmission lines, against electricity producers, which want to sell energy into the utilities' markets. A recent Department of Energy report found that, "Some utilities are concerned that transmission investments may be of greater benefit to their competitors than to themselves. As a result, many promising technologies are stranded."

But one argument should win popular support in favor of new technologies - it will save consumers money. Congestion within a national grid costs Americans hundreds of millions of dollars a year by preventing utilities from buying electricity at the cheapest possible price, which is often generated out of state in the deregulated market. Power failures cost businesses an estimated $100 billion a year, according to the Electric Power Research Institute (EPRI). EPRI represents more than 1,000 utility companies from rural and urban regions.

As utility companies grapple with the possible shutdown of some older plants and look for new high capacity power lines, environmental activists warn that the blackout is being used as an excuse to build up the power system adequate planning. "The energy industry will always use the threat of blackouts to forward their own narrow interests," said Rob Sargent, senior energy policy analyst for the National Association of State Public Interest Research Groups. "The question is are we going to prioritize energy efficiency and more and small local sources of power that would make the system more nimble and efficient."

WHO LET THE LIGHTS GO OUT?

A combination of power plant shutdowns, line failures and voltage problems that were building for several hours before the final crash resulted in the blackout - according to a September 12 U.S-Canadian Task Force report. The initial findings do not provide a precise cause for the August 14 blackout or why it cascaded over such a wide area. The U.S members of the Task Force are Tom Ridge, Secretary of Homeland Security, Pat Wood, Chairman of FERC, and Nils Diaz, Chairman of the Nuclear Regulatory Commission.

Many allege that FirstEnergy Corp., the Akron, Ohio-based utility company was primarily responsible for the unprecedented blackout. The company has repeatedly stated that the error was too big to be its fault alone. But many of the plants and transmission lines that failed and were a significant part of the problem belonged to the utility company.

On September 4, H. Peter Burg, FirstEnergy's chairman and chief executive, defended the company before the House Energy and Commerce Committee, attributing the outage to a combination of factors, including an inadequate transmission system across the U.S. But embarrassing transcripts of e-mail messages revealing total lack of communication and confusion among company executives were already circulating in the national media by then. Some House lawmakers accused the company of neglect. Burg acknowledged that "communications systems need to be upgraded," but he argued that information about the Ohio system's performance was available through automatic data communication to the regional grid manager, which monitors power systems in 20 states.

FIRSTENERGY: SOME POINTS OF INTEREST

FirstEnergy Corp. is a public utility holding company headquartered in Akron, Ohio. Its seven electric utility operating companies comprise the nation's fourth largest investor-owned electric system. The company's combined service areas encompass approximately 37,200 square miles in Ohio, New Jersey and Pennsylvania. The areas they serve have a combined population of approximately 11.1 million. The company's annual revenues are more than $12 billion. The company' sources of generation for fuel supply during 2002 were 65.6 percent coal and 34.4 percent nuclear (including the controversial Three Mile Island facility).

The Center for Responsive Politics reported that members of the Energy and Commerce Committee, Republicans and Democrats alike, raised more than $7 million from utility companies in the last 15 years. The center ranked FirstEnergy 14th among Top contributors to committee members. According to the Federal Elections Commission, the company's political action committee (PAC) gave about $275,000 to candidates and political action committees during the 2001-2002 election cycle, including money to both Ohio's senators, Republicans George Voinovich and Mike DeWine, as well as a bipartisan sample of Ohio's representatives. Its PAC had to take back some money because it breached spending limits. President Bush appointed Anthony Alexander, the president of the company, to serve on the administration's Energy Transition Team. Alexander was a named a campaign "pioneer" for raising more than $100,000 for the Bush's presidential campaign. Chairman and CEO Burg helped organize a fund-raiser for Vice President Cheney that brought in approximately $600,00 for the Bush-Cheney re-election campaign.

CONCLUSION

Since the power failures in the Northeast in the summer of 1999 and the catastrophic energy crisis in California in 2001, Americans have become painfully aware of the precarious state of our nation's electricity system. The August power outage and those caused by Hurricane Isabel exposed the vulnerabilities of the system even more. Instead of doling out tax incentives to companies that influence politicians with campaign contributions and giving more authority to unaccountable and ineffective government agencies, Americans should demand that Congress shapes an energy policy that includes mandatory electric reliability standards for the electric industry and prioritizes energy efficiency. Only then can we hope to progress towards a more reliable system with adequate safeguards.

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